Finance Matters

Archive for July, 2010

If an effort to compete with his American counterpart, French President Nicolas Sarkozy has ordered a 147 million pound ($230 million) jet to be his French Air Force One, according to The Telegraph (via Gawker).

Nicknamed Air Sarko One, the plane is set to have a wingspan 2 feet longer than U.S. President Barack Obama’s Air Force One.

The plane is set to be finished by October and has already taken its first test flight.

It remains to be seen how the French public will react to the new plane that will be touring President Sarkozy and wife Carla Bruni around the world. Sarkozy has been under increasing pressure for his alleged involvement in a campaign finance scandal.

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Chelsea Clinton will rank with a short list of celebrities and billionaire children that spent over $1 million for a wedding. For those keeping count, her parents have earned nearly $150 million in the decade since Bill left office.

Her $3-5 million affair may be the third most expensive celebrity wedding ever.

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Ezra Klein has a post promoting Blinder and Zandi’s model that shows massive good effects from more government deficit spending. As the model is a 1970′s vintage approach, an approach that attracted the nations best minds for decades, and was abandoned because they don’t work better than rather simple alternatives (eg, a vector autoregression of GDP, Fed Funds, and the Baa-Aaa spread).

I found this amusing because it highlights that journalists grab whatever science supports their ends. The details are not important, you have a professor with lots of publications, he has a complicated scientific argument, it makes you an objective, rational journalist. He even quotes Narayana Kocherlakota saying macro models work, not realizing the Kocherlakoto was actually talking about a very different class of models than the one Blinder and Zandi use, and forgetting that of course a macroeconomist would say macro theory works.

At one point, Klein reaches for this argument for believing in their results:

It’s also worth noting that the private sector relies extensively on these models, and it would be odd for them to give Moody’s all that money if they thought there was no predictive value.

Presumably, he infers that as Zandi works for Moody’s, his results are somehow used by Moody’s. They are, but not in the way he thinks. I used to work at Moody’s. Moody’s does not make money off their macro economic opinions, they make money issuing ratings on debt, something they are paid well for. The macro view is alluded to in any analyst opinion, but even within Moody’s it’s not like the analysts think their economist knows better than others. CNBC and the outlets need someone to comment on macroeconomic topics, so having a full time economist discuss these things makes sense. Yet, remember, economists can’t predict business cycles, or explain why Mexico is poor, while the US is rich. Sure, people have theories, but there’s no consensus, highlighting that macroeconomists don’t understand the big issues on their plate.

I worked directly for Chief Economists at two major banks, First Interstate in the late 1980′s, and KeyCorp in the 1990′s. While it would be nice to know when the next recession, or interest rate move, is occurring, no one thought the economist knew better than other random members of the executive committee. Economists are good at presenting the information that seems useful, but as per tying it together, they can’t and most people making important decisions. This is why economists are always on TV, and not in boardrooms. It is also why economics departments at banks have gone from large staffs in the 1970s (at the height of the Keynesian modeling boom), to basically one guy, because it was discovered his or her only value is getting the company name on TV. If someone presents themselves as especially credible because they were a chief economist, I know they are fools.

I spent 3 years of my life working directly for private sector macroeconomists, and the main thing I learned is they don’t know anything useful. It’s like studying the labor theory of value: if you really understand it and have tested it empirically, you use such knowledge on the subject only in arguing with naive people who think the theory can buttress their arguments. I try to rationalize my waste of time on this subject by saying ‘well, I now know really well what we don’t know’, but as the list of irrelevant theories is infinite, if I could redo my career I would have just ignored it all from the outset.

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This guest post previously appeared at Falkenblog >

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In a very alarming sign for the U.S. economy, foreclosures have continued to dramatically increase in 2010.  But there has been a shift.  Back in 2007 and 2008, experts tell us that most foreclosures were due to toxic mortgages.  People were being suckered into mortgages that they couldn’t afford with “teaser rates” or with payments that would dramatically escalate after a few years, and when those mortgages reset, the people who had agreed to them no longer could make the payments. 

But now RealtyTrac says that unemployment has become the major reason for foreclosures.  Millions of Americans have become chronically unemployed during the economic downturn and many of them are losing their homes as a result.  But whatever the cause, one thing is certain – foreclosures have continued to skyrocket at a staggering rate.

According to a new report from RealtyTrac, foreclosure filings climbed in 75% of the nation’s metro areas during the first half of 2010.  At a time when the Obama administration believes that we are “turning the corner”, things just seem to get even worse. 

Some areas of the country continue to be complete and total disaster areas when it comes to real estate.  For example, you have got to feel really sorry for anyone trying to sell a house down in Florida right now.  According to RealtyTrac, Florida led the way with nine of the top 20 metro foreclosure rates in the country during the first half of 2010.

Ouch.

But the worst city for foreclosures continues to be Las Vegas.

According to RealtyTrac spokesman Rick Sharga, unemployment has replaced bad loans as the number one cause of foreclosures there….

“Las Vegas has seamlessly shifted from having a high level of foreclosures due to bad loans to defaults caused by a high level of unemployment.”

But other cities with high unemployment rates are having huge problems as well.

For those who believe that the economy is supposed to be “improving”, it must seem really odd that foreclosure rates in major cities such as Chicago continue to soar.

RealtyTrac says that foreclosure filings in Chicago have increased 23 percent year-over-year to one out of every 48 households.

But it isn’t just cities like Las Vegas and Chicago that are nightmares right now.

The truth is that this is a national crisis.

The Mortgage Bankers Association recently announced that more than 10% of all U.S. homeowners with a mortgage had missed at least one mortgage payment during the January to March time period.  That was a new all-time record and represented an increase from 9.1 percent a year ago.

Unfortunately, new all-time records are being set all over the place….

*The number of home foreclosures set a record for the second consecutive month in May.

*Banks repossessed 269,962 U.S. homes during the second quarter of 2010, which was a new all-time record.

*As of March, U.S. banks had an inventory of approximately 1.1 million foreclosed homes, which was a new record and which was up 20 percent from a year ago.

So is there any hope that things are going to get better soon?

Well, according to RealtyTrac’s CEO James Saccacio, that depends on the U.S. economy….

“The fragile stability achieved in many local housing markets hinges on improvements in the underlying economy, specifically job growth. If unemployment remains persistently high and foreclosure prevention efforts only delay the inevitable, then we could continue to see increased foreclosure activity and a corresponding weakness in home prices in many metro areas.”

Without good jobs, the American people are not going to be able to pay their mortgages.

So are the millions upon millions of jobs that have been lost coming back soon?

No, unfortunately they are not.

As we discussed at length in a previous article, the big global corporations that dominate our economy are figuring out that they don’t really need the rest of us anymore.  The American worker is becoming obsolete.  After all, why pay an American ten times as much to do the same job?  Big corporations can hire two people in China or India to do the same job and still pocket 80% of the difference.

In addition, big corporations don’t really need the headache of making employer contributions to Social Security, setting up benefit packages and pension plans or of trying to comply with the thousands upon thousands of ridiculous regulations that the U.S. government continues to spew out.

At this point, the American worker has become extremely unattractive for large corporations, and so jobs will continue to migrate to other areas of the world.

We allowed our politicians to merge us into a “global economy”, so now we are all going to have to deal with being part of a “global workforce”.

As jobs continue to be offshored and outsourced, more Americans are going to become unemployed and the foreclosure crisis is going to continue to be a nightmare.

It would be nice to put a positive spin on all of this, but there isn’t one.

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This guest post previously appeared at the author’s blog >

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Theo Leggett talks to Alexey Fedorov, head of Russia’s United Aircraft Corporation.